Bar Harbor Bankshares — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. The company operates through Bar Harbor Bank & Trust, serving Maine markets. On August 10, it acquired Border Trust Company operations, including three branches, $38.5 million of deposits and $33.6 million of loans. Results include Border Trust from the acquisition date.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $9.414 | $8.704 | $27.384 | $25.662 |
| Provision for loan losses | $0.427 | $0.750 | $1.302 | $1.850 |
| Non-interest income | $2.298 | $2.064 | $5.972 | $5.281 |
| Non-interest expense | $6.559 | $5.684 | $18.524 | $16.981 |
| Net income | $3.368 | $3.010 | $9.636 | $8.652 |
| Diluted EPS | $0.86 | $0.77 | $2.46 | $2.23 |
| Tax-equivalent net interest margin | 3.20% | 3.24% | 3.22% | 3.23% |
- Q3 net income rose 11.9%; nine-month net income rose 11.4%. Q3 ROA was 1.05% and ROE 10.49%; nine-month ROA was 1.04% and ROE 10.37%.
- Net interest income increased despite lower asset yields: lower funding costs and growth in average earning assets supported results. The tax-equivalent margin declined four basis points in Q3 and one basis point year to date.
- At September 30, total assets were $1,295.4 million, up 11.0% from year-end; loans were $808.4 million, up 10.9%; available-for-sale securities were $421.8 million, up 10.5%.
- Deposits were $813.6 million, up 12.6%; total borrowings were $343.8 million, up 7.4%. Shareholders’ equity was $129.2 million.
- Allowance for loan losses was $8.1 million, or 1.00% of loans. Non-performing loans were $10.7 million, 1.33% of loans, versus $12.9 million and 1.77% at year-end. Nine-month net charge-offs were $1.47 million.
- Operating cash flow was $15.7 million; investing cash outflow was $83.9 million; financing cash inflow was $69.6 million. Ending cash and cash equivalents were $10.0 million. The bank reported 30-day and 90-day liquidity of 7.6% and 7.8%, respectively, and about $140 million of available FHLB capacity plus a $175.1 million secured Federal Reserve line.
- The company reported consolidated total risk-based capital of 15.67%, Tier 1 risk-based capital of 14.03%, and Tier 1 leverage of 8.83%; the bank was classified as well capitalized.
Changes, outlook, and risks
- Border Trust added assets and deposits but also contributed $829,000 in year-to-date non-recurring acquisition expenses, including $657,000 in Q3. Goodwill recorded was $2.073 million. Management cited severance, professional fees, and conversion costs.
- Credit quality improved overall, though real-estate exposure remains material. A troubled affordable-housing project loan accounted for $2.225 million of non-performing loans; cumulative charge-offs on that loan reached $2.014 million, including $192,000 in Q3.
- Private-label mortgage-backed securities remained a key risk. The company recorded $781,000 of year-to-date credit impairment losses in earnings and said revised collateral loss-severity and default assumptions drove additional losses. Management expected to recover amortized cost on the portfolio, but warned that adverse repayment performance or fair-value changes could alter that assessment.
- Management cited Maine economic conditions, tourism, real-estate values, loan performance, competition, and historically low interest rates as key uncertainties. Its rate model estimated net interest income changes versus a flat-rate scenario of -1.02% and +1.60% over one year for a 100-basis-point decline and 200-basis-point rise, respectively; over two years, -3.43% and +6.19%. These are model scenarios, not forecasts.
- No specific earnings guidance was provided. The board declared a Q4 2012 dividend of $0.30 per share. The share-repurchase authorization was extended through August 19, 2014; no shares were repurchased in the first nine months of 2012.
- Commitments to originate loans were $56.1 million, unused lines $102.9 million, and undisbursed construction loans $12.1 million. Management said routine litigation was not expected to have a material effect; no material risk-factor changes were reported. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Cash-flow presentation: The cash-flow statement labels the $1.325 million change as a “net decrease,” although beginning cash of $8.720 million and ending cash of $10.045 million indicate an increase.
- Acquisition accounting and integration: Verify final Border Trust fair values, goodwill and intangible amortization, realized cost savings, and whether acquisition-related expenses remain non-recurring.
- Credit and reserve assumptions: Track the affordable-housing exposure, delinquency and problem-loan trends, charge-offs, and the adequacy of the allowance as loans grow.
- Investment impairment: Monitor private-label mortgage-backed security collateral performance and the assumptions underlying expected recovery of amortized cost.
- Funding and rate sensitivity: Assess reliance on borrowings and brokered deposits, seasonal liquidity, and the effect of continued low rates or changing deposit behavior on margin and earnings.